BORIS FELDMAN, State Bar # 128838
JEROME F. BIRN, JR., State Bar # 128561
GIDON M. CAINE, State Bar # 188110
CHRISTINE A. KENDRICK, State Bar # 186002
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (650) 493-9300

Attorneys for Defendants
TCSI CORPORATION, ROGER A. STRAUCH,
DANIEL H. MILLER, JOHN C. BOLGER,
RAM A. BANIN, WILLIAM A. HASLER,
DAVID G. MESSERSCHMITT, and PAUL A. FARMER

NOTICE OF MOTION AND MOTION

MEMORANDUM OF POINTS AND AUTHORITIES

INTRODUCTION

BACKGROUND

ARGUMENT

I. THE REFORM ACT'S SAFE HARBOR IMMUNIZES STATEMENTS IN TCSI'S PRESS RELEASES AND SEC FILINGS

A. TCSI's Press Releases and SEC Filings Complied With the Safe Harbor

B. The "Bespeaks Caution" Doctrine Also Precludes Liability.

II. THE COMPLAINT DOES NOT PLEAD SPECIFIC FACTS SHOWING THAT TCSI'S STATEMENTS WERE FALSE WHEN MADE

A. Plaintiffs Allegations Do Not Comply With The Reform Act's Information and Belief" Provision.

B. Plaintiffs Do Not Plead Specific Facts to Support Their Conclusory Beliefs That Defendants Made False Statements.

1. There Are No Specific Facts Showing That TCSI's Forecasts Were False

2. There Are No Specific Facts Showing That TCSI's Accounting Was Fraudulent

3. TCSI's Statements of Historical Fact And General Statements of Optimism Cannot Support A Claim of Fraud

III. THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS GIVING RISE TO A STRONG INFERENCE OF FRAUDULENT INTENT

A. The Reform Act Requires Actual Knowledge of Falsity

B. The Complaint's Allegations of Unspecified Internal Corporate Documents Do Not Give Rise To a Strong Inference of Actual Knowledge

C. Defendants' Stock Sales Do Not Give Rise to a Strong Inference of Scienter

IV. PLAINTIFFS PLEAD NO SPECIFIC FACTS SHOWING THAT DEFENDANTS ARE LIABLE FOR SECURITIES ANALYSTS' REPORTS

V. THE COMPLAINT DOES NOT ALLEGE THAT MILLER, BOLGER, BANIN, HASLER, OR MESSERSCHMITT MADE A FALSE STATEMENT

CONCLUSION

Acito v. IMCERA Group, Inc.,
    47 F.3d 47 (2d Cir. 1995)

Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,
    511 U.S. 164 (1994)

Duncan v. Pencer,
    [1995-1996 Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 99,043 (S.D.N.Y. Jan. 18, 1996)

Garcia v. United States,
    469 U.S. 70 (1984)

Hockey v. Medhekar,
    [Current Transfer Binder] Fed. Sec. L. Rep. (CCH)
    ¶ 99,465 (N.D. Cal. Apr. 15, 1997)

In re Apple Computer Sec. Litig,
    886 F.2d 1109 (9th Cir. 1989)

In re Caere Corp. Sec. Litig.,
    837 F. Supp. 1054 (N.D. Cal. 1993)

In re GlenFed, Inc. Sec. Litig.,
    42 F.3d 1541 (9th Cir. 1994)

In re GlenFed, Inc. Sec. Litig.,
    60 F.3d 591 (9th Cir. 1995)

In re Gupta Corp. Sec. Litig.,
    900 F. Supp 1217 (N.D. Cal. 1994)

In re Media Vision Tech. Sec. Litig.,
    [1995-96 Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 98,958 (N.D. Cal. Oct. 23, 1995)

In re OPTi, Inc. Sec. Litig.,
    No. C-95-3434 SBA (N.D. Cal. Mar. 31, 1997)

In re Oak Tech. Sec. Litig.,
    No. 96-20552 SW, 1997 WL 448168
    (N.D. Cal. Jul. 1, 1997)

In re Quarterdeck Office Sys., Inc., Sec. Litig.,
    854 F. Supp. 1466 (C.D. Cal. 1994)

In re Ross Sys. Sec. Litig.,
    [1994-1995 Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 98,363 (N.D. Cal. Jul. 21, 1994)

In re SciClone Pharmaceuticals Sec. Litig.,
    No. C-94-1485 (N.D. Cal. Mar. 10, 1995)

In re Silicon Graphics, Inc. Sec. Litig.,
    970 F. Supp. 746 (N.D. Cal. 1997)

In re Software Publishing Sec. Litig.,
    [1993-1994 Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 98,094 (N.D. Cal. Feb. 2, 1994)

In re Stac Elecs. Sec. Litig.,
    89 F.3d 1399 (9th Cir. 1996),
    cert. denied, 117 S. Ct. 1105 (1997)

In re Stratosphere Corp. Sec. Litig.,
    [Current Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 99,473 (D. Nev. May 21, 1997)

In re Syntex Corp. Sec. Litig.,
    855 F. Supp 1086 (N.D. Cal. 1994),
    aff'd, 95 F.3d 922 (9th Cir. 1996)

In re Syntex Corp. Sec. Litig.,
    95 F. 3d 922 (9th Cir. 1996)

In re Worlds of Wonder Sec. Litig.,
    35 F.3d 1407 (9th Cir. 1994)

Leonard v. NetFRAME Sys., Inc.,
    [1995-1996 Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 98,982 (N.D. Cal. Aug. 8, 1995)

Neubronner v. Milken,
    6 F.3d 666 (9th Cir. 1993)

Raab v. General Physics Corp.,
    4 F.3d 286 (4th Cir. 1993)

Rasheedi v. Cree Research, Inc.,
    [Current Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 99,566 (M.D.N.C. Oct. 17, 1997)

Resolution Trust Corp. v. Gallagher,
    10 F.3d 416 (7th Cir. 1993)

San Leandro Emerg. Med. Group Profit Sharing Plan v. Philip Morris Cos.,
    75 F.3d 801 (2d Cir. 1996)

Shuster v. Symmetricon, Inc.,
    [Current Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶ 99,437 (N.D. Cal. Feb. 25, 1997)

Stack v. Lobo,
    903 F. Supp. 1361 (N.D. Cal. 1995)

Stack v. Lobo,
    No. 95-20049, 1995 WL 241448 (N.D. Cal. Apr. 20, 1995)

United States v. Granderson,
    511 U.S. 39 (1994)

Zeid v. Kimberley,
    973 F. Supp. 910 (N.D. Cal. 1997)

Zuber v. Allen,
    396 U.S. 168 (1969)

15 U.S.C. § 78n

15 U.S.C. § 78u-4

15 U.S.C. § 78u-5

H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 31 (1995)

PLEASE TAKE NOTICE that on March 10, 1998, at 2:00 p.m., in the Courtroom of the Honorable Saundra Brown Armstrong, 1301 Clay Street, Suite 400S, Oakland, California, defendants TCSI Corporation ("TCSI"), Roger A. Strauch, Daniel H. Miller, John C. Bolger, Ram A. Banin, William A. Hasler, David G. Messerschmitt, and Paul A. Farmer will move for an Order dismissing the Complaint with prejudice. This motion is made pursuant to Fed. R. Civ. P. 12(b)(6) and the Private Securities Litigation Reform Act of 1995 ("Reform Act"), which added Section 21D to the Securities Exchange Act of 1934, 15 U.S.C. § 78u-4 ("Exchange Act").

The issues presented in this motion are whether: (1) statements made by TCSI in certain press releases and SEC filings are immunized from liability by the Reform Act's Safe Harbor; (2) plaintiffs have alleged with particularity specific facts demonstrating that defendants' challenged statements were false when made, as required by Section 21D(b)(1) of the Reform Act; (3) plaintiffs have alleged with particularity specific facts giving rise to a "strong inference" that defendants' statements were made with actual knowledge that they were false, as required by Sections 21D(b)(1) & (2) of the Reform Act; (4) plaintiffs have alleged specific facts showing that defendants may be held liable for statements made in stock analyst reports and news articles, and whether plaintiffs have alleged specific facts showing that defendants knew that these statements were false when made.

This motion is based on this Notice of Motion and Motion, the Memorandum of Law that follows, the supporting Declaration of Christine A. Kendrick (the "Kendrick Decl."), all pleadings and papers filed herein, and any oral argument of counsel or other matters that may be submitted.

The premise of this securities class action is that, because TCSI's predictions of future performance for the third quarter of 1996 proved inaccurate, all of its forecasts during the prior eleven months must have been fraudulent. The Complaint rambles on for 89 pages, reciting lengthy passages from TCSI's press releases and filings with the Securities and Exchange Commission ("SEC"), and retyping large blocks of text from various reports written by stock analysts about the Company. What is missing is a single fact showing that defendants actually knew that their forecasts were false when they made them.

Here is all that happened. On September 25, 1996, TCSI announced that it would suffer a loss for its third quarter of 1996 (ending September 30, 1996). TCSI explained that several licensing contracts it had previously expected to sign by the end of the quarter, including a major contract with a Regional Bell Operating Company, were unlikely to be signed. Kendrick Decl. Ex. A.¹ On October 16, 1996, TCSI reported that a long term contract with United Parcel Service ("UPS") had been terminated, requiring a writeoff of certain related assets, which would increase the third quarter loss. Id. at Ex. B.

The Complaint presumes that defendants knew of these problems in October 1995. It asserts that positive statements defendants made about TCSI's business between October 1995 and September 1996 were fraudulent, and that TCSI should have written off the UPS contract during the first half of 1996. It also asserts -- without any factual basis -- that TCSI is responsible for the opinions published by securities analysts about TCSI during this time. Absent is a single allegation of fact showing that defendants actually knew for almost a year that revenues in the September 1996 quarter would fall short, or that UPS would terminate a long-term contract in October 1996.

Despite its length, the Complaint deliberately omits TCSI's detailed disclosures of the risks that it faced. For example, TCSI warned that its quarterly results would be volatile because income is "derived from software licensing fees from a limited number of customers" who control "the timing and level of expenditures" and "typically" do not sign contracts until "the last weeks or even days of a quarter." TCSI disclosed that the Regional Bell Operating Companies "have become increasingly cautious in making significant capital expenditures." Kendrick Decl. Ex. C at 12, 16. That was the precise risk that caused the revenue shortfall at issue. TCSI also warned about intense competition, including the risk that existing contracts could be canceled or modified. Id. at 12.

Importantly, the Complaint ignores risk disclosures in a prospectus that TCSI filed in connection with its March 27, 1996 stock offering -- right in the middle of the class period. More than 80 percent of the shares sold by defendants during the class period were sold in that offering. But the Complaint does not allege with any specificity that any statement in that prospectus was false. Complaint ¶ 106. That the Complaint does not challenge the prospectus' risk disclosures shows that this is not a case about fraud, but rather a hindsight attempt to undo a risky investment.

This case is subject to the Reform Act. Congress passed the Reform Act to put an end to private securities lawsuits such as this one that are premised on nothing but a quarterly forecasting miss and hindsight. Congress enacted the Reform Act after finding "significant evidence of abuse in private securities lawsuits." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Session 31 (1995) ("Conf. Rep.") (Kendrick Decl. Ex. D).² One abuse of particular concern was that high technology companies were being sued based on no more than a modest failure to meet quarterly forecasts. Congress sought to remedy these abuses by creating "needed procedural protections to discourage frivolous litigation." Id. at 32. Among these protections are a statutory "Safe Harbor" for forward-looking statements, "heightened pleading" standards much more rigorous than prior Ninth Circuit law, and a new state of mind requirement for forward-looking statements: "actual knowledge." 15 U.S.C. §§ 78u-4 to 78u-5. A complaint pleaded on "information and belief," such as this Complaint, must plead all the facts in plaintiffs' possession supporting an allegation that defendants made a false statement. 15 U.S.C. § 78u-4(b)(1). Those specific facts, in turn, must give rise to a "strong inference" that each defendant acted with fraudulent intent. 15 U.S.C. § 78u-4(b)(2).

This Complaint fails to meet the Reform Act's rigorous new pleading standards. TCSI's press releases and SEC filings complied with the statutory Safe Harbor. Thus, all of the forward-looking statements in these documents are immunized from liability; in any event, these statements would not have been actionable under the "bespeaks caution" doctrine.

The Complaint independently fails to comply with the Reform Act's pleading requirements. Because the Complaint is pleaded on information and belief, plaintiffs must set forth "all facts" they have that support their belief that a fraud occurred. Plaintiffs have not set forth any "specific facts," but only their conclusory speculation. Plaintiffs also fail to plead "specific facts" giving rise to a "strong inference" that defendants' forecasts were made with "actual knowledge" that they were false when made.

Congress mandated that plaintiffs must plead specific facts or a complaint shall be dismissed at the pleading stage. Plaintiffs have pleaded just conclusory speculation. They have no facts showing that defendants knew since October 1995 of the problems that arose in September 1996.

TCSI provides sophisticated software to telecommunications companies, including the Regional Bell Operating Companies.³ TCSI's business is based on negotiating multimillion dollar, long term licensing contracts to develop advanced software.

TCSI went public in July 1991. During the next four years, the Company reported increasing revenues and earnings.⁴ In response, TCSI's stock price rose from its initial price of $10 per share to $29.75 by June 1996, albeit with the volatility common to high technology stocks.

The putative class period runs from October 11, 1995, through September 25, 1996 (the "Class Period"). It begins with TCSI's announcement of results for the third quarter of 1995 (ended September 30, 1995), in which net income grew by 50% over the prior year. TCSI's business continued to meet Wall Street's expectations through the second quarter of 1996 (ended June 30, 1996).⁵ The class period concludes with TCSI's disclosure, on September 25, 1996, before the end of the third quarter and weeks before its normal announcement, that TCSI expected to report a loss for the quarter. TCSI explained that, "[a]s previously indicated, the nature of our business is such that it is difficult to predict the size and timing of significant customer engagements and license fees. We recently determined that a number of agreements that we had anticipated to close during the quarter will likely not close by quarter-end." Kendrick Decl. Ex. A. On October 16, 1996, TCSI announced the termination of its long term contract with UPS, requiring TCSI to write down certain related assets, increasing the third quarter loss. Id. at Ex. B. The Complaint alleges that numerous statements TCSI made about its business during the Class Period were false. The Complaint also includes conclusory allegations of accounting fraud.⁶

I. THE REFORM ACT'S SAFE HARBOR IMMUNIZES STATEMENTS IN TCSI'S PRESS RELEASES AND SEC FILINGS

Congress found that the existing system of private securities litigation had a "muzzling effect" on "the willingness of corporate managers to disclose information to the marketplace" because companies and their officers were subjected to potentially limitless liability if they disclose projections that later turn out to be inaccurate. Conf. Rep. at 42-43. Congress was especially concerned about the chilling effect on high technology companies:

Technology companies -- because of the volatility of their stock prices -- are particularly vulnerable to securities fraud lawsuits when projections do not materialize. If a company fails to satisfy its announced earnings projections -- perhaps because of changes in the economy or the timing of an order or new product -- the company is likely to face a lawsuit.

Id. at 43.

Congress decided to encourage companies to make forward-looking statements by creating a statutory "Safe Harbor" for forward-looking statements. The goal of the Safe Harbor is "to provide certainty that forward-looking statements will not be actionable by private parties . . . if they are accompanied by a meaningful cautionary statement." Id. at 43-44 (emphasis added).⁷

The Safe Harbor creates two new separate and independent defenses to liability. First, a defendant shall not be liable for a forward-looking statement if it is "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement." 15 U.S.C. § 78u-5(c)(1)(A). "Cautionary statements" are considered "meaningful" if they "convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statement, such as, for example, information about the issuer's business." Conf. Rep. at 43. The "[f]ailure to include the particular factor that ultimately causes the forward-looking statement not to come true will not mean that the statement is not protected by the safe harbor." Id. at 44.⁸

Courts must determine, at the pleading stage, whether a company's forward-looking statements fall within this part of the Safe Harbor. 15 U.S.C. § 78u-5(e). Congress directed courts to consider all information and documents relevant to determine whether a defendant gave the Safe Harbor warning and made "meaningful cautionary statements," regardless of whether the information and documents are cited in the Complaint. Conf. Rep. at 47. Plaintiffs cannot avoid dismissal if defendants satisfied the requirements of the Safe Harbor.

A. TCSI's Press Releases and SEC Filings Complied With the Safe Harbor.

After Congress passed the Reform Act, TCSI began to comply with the Safe Harbor. TCSI gave the required warning in its press releases and SEC filings, and included "meaningful cautionary statements" identifying "important factors that could cause its actual results to vary." Because TCSI complied with the Safe Harbor, none of the forward-looking statements in these documents is actionable.

Plaintiffs allege that TCSI made false forward-looking statements in press releases the Company issued on April 17 and July 18, 1996. Plaintiffs selectively omit that both of these press releases included the Safe Harbor warning.⁹ TCSI complied with the Safe Harbor by providing the warning and identifying important factors that could cause actual results to vary -- including the risk that caused the third quarter shortfall, "fluctuations in customer demand." TCSI also referred investors to its SEC filings which, as discussed below, were loaded with other risk disclosures. See Rasheedi v. Cree Research, Inc., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,566 (M.D.N.C. Oct. 17, 1997) (dismissing claims based on forward-looking statements in press releases, under Safe Harbor "[d]efendants do not have to caution against every conceiveable factor that may cause results to differ").

Plaintiffs allege that TCSI made false statements in the prospectus filed in connection with the March 1996 stock offering. Complaint ¶ 60. Again, plaintiffs selectively omitted the Safe Harbor warning in this document.¹⁰ This Safe Harbor warning referred investors to very detailed disclosures of the risks that TCSI was facing. In particular, defendants warned investors that TCSI's revenues and earnings were highly dependent on customer decisions to sign licensing agreements, which were difficult to predict:

A significant portion of the Company's revenues and operating income have been, and are expected to continue to be, derived from software licensing fees from a limited number of customers. Variability in the timing of such license fees has caused and may continue to cause material fluctuations in the Company's business, operating results, and financial condition. . . . [T]he Company is substantially dependent on its customers' decisions as to the timing and level of such expenditures and resource commitments. In addition, the Company typically realizes a significant portion of license revenues in the last weeks or even days of a quarter. As a result, the magnitude of quarterly fluctuations may not become evident until late in, or after the close of, a particular quarter.

Kendrick Decl. Ex. C at 5 (emphasis added). Defendants warned that competition in TCSI's markets was intense, often including competition with internal development efforts at the Regional Bell Operating Companies who were TCSI's customers:

The Company's principal customers are concentrated among major telecommunications carriers, including regional bell operating companies. . . . [T]he telecommunications industry . . . has recently been characterized by intense competition in the development of new technology, equipment, and customer services. . . . The Company offers products and services in the evolving market for ISM and distributed object technology. Competition in this market is intense . . . .

Id. at 7, 8 (emphasis added). Defendants also warned that customers would no longer be funding TCSI's research and development.¹¹ Finally, defendants warned that customer contract cancellations were a possibility and would dramatically affect TCSI's financial results.¹² Thus, all challenged forward-looking statements in these documents are protected by the Safe Harbor and the Complaint must be dismissed.

B. The "Bespeaks Caution" Doctrine Also Precludes Liability.

Even under prior Ninth Circuit law, the challenged statements are not be actionable under the "bespeaks caution" doctrine. Under this doctrine, a company's forward-looking statements are not actionable where the company has made meaningful and specific cautionary disclosures about the subject matter of the alleged misrepresentation. In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1408 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997). Courts may rule "as a matter of law" at the pleading stage that "defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994) (citation omitted). This Court has consistently have followed Worlds of Wonder and dismissed actions at the pleading stage. In re OPTi, Inc. Sec. Litig., No. C-95-3434 SBA, slip op. at 25 (N.D. Cal. Mar. 31, 1997)¹³ (dismissing complaint where in light of defendants' specific warnings, no reasonable investor would have been misled); In re SciClone Pharmaceuticals Sec. Litig., No. C-94-1485 SBA, slip op. at 18 (N.D. Cal. Mar. 10, 1995) (dismissing amended complaint with prejudice in part based upon "detailed cautionary language" in a prospectus).

In passing the Reform Act, Congress noted approvingly that many courts of appeal have applied the bespeaks caution doctrine to dismiss securities class actions at the pleading stage. Congress expressly encouraged its further development. See Conf. Rep. at 46, 49 n.29.

The bespeaks caution doctrine compels dismissal of the Complaint. The Complaint alleges that TCSI misrepresented that a Regional Bell Operating Company would sign a licensing contract in the third quarter of 1996; that TCSI was otherwise well positioned to compete;¹⁴ and that TCSI's customers would continue to fund its research and development.¹⁵ The Complaint also alleges that TCSI knew by December 1995 that its contract with UPS would be terminated at a loss.¹⁶

Throughout the Class Period, however, TCSI warned of significant risks concerning each of these matters. TCSI warned that Regional Bell Operating Companies had become "increasingly cautious in making significant capital expenditures;" that "[c]ompetition in this market is intense;" and that there was always a risk of "cancellation, modification or non-renewal of license or maintenance agreements." See pp. 8-9, supra. TCSI repeated its detailed risk disclosures in its 1995 Form 10-K, the Prospectus for the March 1996 offering, and in its quarterly filings on SEC Form 10-Q.¹⁷ Indeed, TCSI expressly disclosed that its clients had ceased to fund research and development. The Prospectus states: "Management expects that, as a result of its product development strategy, internally funded research and development costs may become material in future periods." Kendrick Decl. Ex. C at 17, 20.

II. THE COMPLAINT DOES NOT PLEAD SPECIFIC FACTS SHOWING THAT TCSI'S STATEMENTS WERE FALSE WHEN MADE

The Reform Act requires that the Complaint plead each statement alleged to be misleading with particularity, and mandates that the Complaint set forth in detail "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1)(B). Where an allegation is made on information and belief, as here, the Complaint also must "state with particularity all facts on which that belief is formed." Id. (emphasis added). A complaint that does not meet this requirement "shall" be terminated at the pleading stage. 15 U.S.C. § 78u-4(b)(3)(A).

A. Plaintiffs Allegations Do Not Comply With The Reform Act's Information and Belief" Provision.

The Reform Act's information and belief provision is a significant new requirement. The statute states that plaintiffs must disclose "all facts" that support their beliefs. This Complaint does not even try to comply with the information and belief requirement. Entirely absent from the Complaint are specific facts detailing when, where, and how defendants knew that the challenged statements were false when made. Plaintiffs' only attempt to comply with the statute is a boilerplate paragraph, titled "Basis of Allegations," which states:

[P]laintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of TCSI's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company, private investigations and discussions with consultants, and, pursuant to [Fed. R. Civ. P.] 11(b)(3), believe that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth in ¶¶ 3-6, 11, 12, 14, 15, 32, 33, 50, 56, 58, 74, 84, 87, 91, 95, 96, 98, 100 and 104-106 [the paragraphs of the Complaint containing allegedly false and misleading statements].

Complaint ¶ 124 (emphasis added). This allegation deliberately avoids complying with the statutory requirement of pleading "with particularity all facts" that form plaintiff's belief that defendants committed fraud.

Judges Patel and Smith have both rejected such boilerplate "Basis of Allegations" paragraphs as insufficient under the Reform Act. In Hockey v. Medhekar, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,465, at 97,081 (N.D. Cal. Apr. 15, 1997), Judge Patel rejected a virtually identical paragraph as inadequate under the Reform Act. Similarly, in Silicon Graphics, 970 F. Supp. at 763-64, Judge Smith also rejected the same type of paragraph. Because plaintiffs have failed to comply with the plain language of the Reform Act's information and belief provision, the Complaint must be dismissed.

B. Plaintiffs Do Not Plead Specific Facts to Support Their Conclusory Beliefs That Defendants Made False Statements.

The Reform Act's rigorous new pleading requirements were intended to strengthen Rule 9(b). Congress found that Rule 9(b) "has not prevented abuse of the securities laws by private litigants," that the Circuits were applying Rule 9(b) in "conflicting ways," and that it was therefore creating "uniform and more stringent pleading requirements." Conf. Rep. at 41 (emphasis added). Because the Reform Act's pleading requirements were based "in part" on Second Circuit law, courts should look to that Circuit's strict particularity requirements. Id. Nothing in the statute or its legislative history suggests that Congress was adopting any aspect of prior Ninth Circuit law. Courts in the Second Circuit have long demanded great particularity before allowing allegations of fraud to survive the pleading stage. E.g., San Leandro Emerg. Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812-13 (2d Cir. 1996) (requiring plaintiffs to identify specifically alleged negative internal reports, providing names and dates). Here, the Complaint fails to plead facts showing that the challenged statements were false when made.

1. There Are No Specific Facts Showing That TCSI's Forecasts Were False.

The Complaint alleges that defendants forecasted continued growth in revenues and earnings during the Class Period, while knowing of the problems that ultimately occurred in September 1996 that caused their forecasts not to come true.¹⁸ As discussed above, the statutory Safe Harbor and the "bespeaks caution" doctrine together render all such forward-looking statements inactionable as a matter of law. Independently, the Complaint's allegations fail to state a claim because plaintiffs do not plead any specific facts showing that TCSI knew earlier in the Class Period of the events that caused the Company to miss its forecasts.

For example, plaintiffs allege that TCSI knew that licensing contracts with a Regional Bell Operating Company and other customers would not close as expected. Complaint ¶¶ 14(g); 84(g); 87(e). Plaintiffs do not plead a single fact showing that TCSI knew this. Plaintiffs do not identify the Regional Bell Operating Company or any other customer. Plaintiffs do not identify any particular documents from which defendants supposedly knew this information or generally that their forecasts were false. Plaintiffs do not identify any percipient witnesses to these events from whom they derived their information. Rather than specific facts, plaintiffs allege only the most vague allegations that defendants knew of "softened" demand, their customers' "diminished commitment," and a "decline" in orders. E.g., Complaint ¶¶ 14(a)-(f), (j)-(l); 50(a)-(d), (g)-(i); 58(a)-(d), (g)-(h); 74(a)-(f), (i)-(k); 84(a)-(f), (j)-(l); 87(a)-(d), (g)-(h). That type of conclusory pleading cannot suffice.

In Shuster v. Symmetricon, Inc., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,437, at 96,865 (N.D. Cal. Feb. 25, 1997), a pre-Reform Act case, this Court rejected similarly vague allegations. This Court dismissed the complaint because it "fail[ed] to point to particular contemporaneous, inconsistent statements by defendants or show that specific information available to defendants revealed something different than what defendants were stating." Id. at 96,866. The Court correctly concluded that plaintiffs failed to state "with particularity the circumstances of the fraud, including the statements made and an explanation as to why or how such statements are false or misleading." Id. at 96,865.¹⁹ This Complaint suffers from the same defects. Because the Reform Act made the pleading requirement more demanding, there is no question that plaintiffs' conclusory allegations are deficient.

2. There Are No Specific Facts Showing That TCSI's Accounting Was Fraudulent.

Plaintiffs allege that by December 1995, TCSI knew that it "was having severe difficulties with its large UPS contract and that due to the additional work and modifications TCSI was having to perform as part of the contract the insiders knew it was probable the contract would ultimately result in a loss for TCSI." Complaint ¶¶ 50(e); 58(e); 74(g); 84(h); 87(f). Plaintiffs allege that "TCSI was falsifying its reported financial results for the fourth quarter of 1995 and the first two quarters of 1996 by not recording and reporting write-downs related to the UPS contract. . . ." Id. at ¶¶ 14(i); 50(f); 58(f); 74(h); 84(i). These conclusory allegations of accounting fraud would have failed prior Ninth Circuit law under GlenFed, and cannot survive the Reform Act.

Plaintiffs do not allege when problems with UPS first arose, when defendants knew that those problems would cause UPS to terminate its contract, or when TCSI knew that the termination would occur on unfavorable terms and require a large write-down of assets. The Complaint relies entirely on hindsight: because the UPS contract eventually was terminated on unfavorable terms, TCSI should have known this would occur and recorded the write-downs earlier. Plaintiffs do not plead a single fact to support their belief that defendants should have done this. Courts in this District routinely dismiss accounting claims that are not supported by specific facts. E.g., Leonard v. NetFRAME Sys., Inc., [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,982, at 93,779-80 (N.D. Cal. Aug. 8, 1995) ("To survive a motion to dismiss, plaintiffs cannot simply allege that specific accounting practices were violated without also providing specific underlying facts to support the allegations").²⁰

Rather than plead facts showing TCSI's knowledge that the UPS contract would be terminated on unfavorable terms, plaintiffs' speculations are refuted by other facts alleged in the Complaint. During the first and second quarters of 1996, when plaintiffs allege that TCSI should have written off the UPS contract, TCSI was deploying $7.2 million of technology to UPS. Compare Complaint ¶¶ 65, 79 (quoting snippets from the relevant press releases results and omitting the discussion of UPS) with Kendrick Decl. Exs. F and G (reporting deployment).²¹

3. TCSI's Statements of Historical Fact And General Statements of Optimism Cannot Support A Claim of Fraud.

The remaining statements cited in the Complaint are historical facts or inactionable "puffery," vague expressions of optimism about the future. E.g., Complaint ¶¶ 40-43, 48, 51-53, 57, 60, 65-66, 71-72, 78-80, 83, 85, 88. Other than the accounting allegations discussed above, the Complaint does not take issue with historical information. The statements of puffery are immaterial as a matter of law because no investor would rely on them in deciding to purchase TCSI stock. One such statement is: "Our objective is to continue to grow through customer satisfaction. . . . We believe TCSI's software is ahead of the competition, and we are well positioned for future growth." Id. at ¶ 42. Corporate executives are not required to take a gloomy or defeatist view of the future, and may express their belief that their company is "well positioned" without exposing the company to liability.²²

III. THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS GIVING RISE TO A STRONG INFERENCE OF FRAUDULENT INTENT

A. The Reform Act Requires Actual Knowledge of Falsity.

Congress created a "heightened" pleading standard for pleading that a defendant acted with scienter. The Reform Act requires a complaint to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). This standard represents a clear rejection of prior Ninth Circuit law, which eschewed any form of "inference" test and allowed scienter to be averred "generally," without any factual basis, "simply by saying that scienter existed." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1545, 1547 (9th Cir. 1994) (en banc). Where plaintiffs allege that defendants made false forward-looking statements, the required state of mind is "actual knowledge" of falsity. 15 U.S.C. § 78u-5(c)(1) & (B) (emphasis added); See Conf. Rep. at 44. Because the Complaint alleges that defendants made false forecasts, it must allege with particularity facts "giving rise to a strong inference" that defendants made those predictions with "actual knowledge" that they could not be achieved.

Here is how the new pleading requirements apply to this Complaint. The Complaint is required to plead particular facts establishing a "strong inference" that defendants actually knew during the class period that TCSI would materially miss its third quarter forecast. The Complaint attempts to satisfy the "strong inference" requirement by (i) alleging the existence of unspecified negative internal reports that supposedly contradict defendants' public statements, and (ii) alleging that defendants' sold large percentages of their available TCSI stock. Both attempts fail.

B. The Complaint's Allegations of Unspecified Internal Corporate Documents Do Not Give Rise To a Strong Inference of Actual Knowledge.

The Complaint alleges that each individual defendant had access to unidentified "internal corporate documents" describing "adverse non-public information" about TCSI. Complaint ¶ 22. In Silicon Graphics, Judge Smith held that such allegations are insufficient as a matter of law. Judge Smith reasoned that every company's management receives reports from its sales force and other internal reports. If the mere allegation that these reports were "negative" were sufficient, any public company could be sued for fraud whenever its stock price dropped -- the evil the Reform Act was intended to prevent. If plaintiffs are to create a strong inference of scienter, their allegations of "negative internal reports" must "include the titles of the reports, when they were prepared, who prepared them, to whom they were directed, their content, and the sources from which plaintiffs obtained this information." Silicon Graphics, 970 F. Supp. at 767. Judges Patel and Williams have applied the same reasoning in dismissing complaints at the pleading stage. Hockey v. Medhekar, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,465, at 97,081-82 (N.D. Cal. Apr. 15, 1997); Zeid v. Kimberley, 973 F. Supp. 910, 920-21 (N. D. Cal. 1997). Because allegations based on unspecified negative internal documents do not satisfy the Reform Act's pleading requirements, the Court should dismiss the Complaint.

C. Defendants' Stock Sales Do Not Give Rise to a Strong Inference of Scienter.

The Complaint also alleges that stock sales by the individual defendants establish their motive and opportunity to commit fraud. Complaint ¶¶ 15-16, 106-107. After the Reform Act, allegations of motive and opportunity no longer suffice as an independent basis to plead scienter. Under the Reform Act, stock sales only give rise to a strong inference of fraud where they constitute circumstantial evidence of defendants' knowledge. This will only occur where the stock sales are "unusual or suspicious." Silicon Graphics, 970 F. Supp. at 767-68 (citing Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995)); accord In re Apple Computer Sec. Litig, 886 F.2d 1109, 1117 (9th Cir. 1989) (sales must be "in suspicious amounts or at suspicious times"). The Complaint simply lists the dates and amounts of the defendants' stock sales, and allege in a conclusory manner that the sales are "suspicious/unusual in amount and timing as pleaded elsewhere herein." Complaint ¶ 107. These allegations cannot withstand scrutiny.

In an effort to inflate the percentages sold by each defendant, the Complaint misleadingly ignores the vested options held by each defendant. These options were as liquid as shares of stock and could have been exercised and sold immediately; in fact, some of the stock sales at issue were same-day option exercises and sales. Courts have recognized that, if stock sales are alleged to be evidence of scienter, the court must consider all of defendants' available holdings, including vested options. Silicon Graphics, 970 F. Supp. at 768; Duncan v. Pencer, [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,043, at 94,208 (S.D.N.Y. Jan. 18, 1996)).

As the chart below shows, the individual defendants did not bail out of TCSI stock. They had significant holdings of TCSI stock and options through the end of the Class Period:²³

In evaluating the information in this chart, it is important to remember that more than 80 percent of the shares sold by Mr. Wagner were sold in the March 1996 stock offering. Because the Complaint does not allege that any statement in the prospectus for this offering were false, these sales are irrelevant to this case. The other amounts sold cannot raise a "strong inference" of scienter because they do not indicate that defendants were bailing out of TCSI. To the contrary, each defendant retained a significant portfolio of TCSI shares months after the end of the Class Period. In analogous situations, courts have held that sales of such amounts of an individual's total stock holdings are insufficient as a matter of law to give rise to a strong inference of fraud.²⁶

IV. PLAINTIFFS PLEAD NO SPECIFIC FACTS SHOWING THAT DEFENDANTS ARE LIABLE FOR SECURITIES ANALYSTS' REPORTS

Most of the statements in the Complaint were made by non-party securities analysts. Complaint ¶¶ 44-47, 49, 54-55, 63-64, 67-69, 70, 73, 75-77, 81-82, 86. These reports cannot form a basis for liability, because plaintiffs do not allege specific facts showing that defendants actually knew that the reports were false when made, or had any involvement in making these reports.

Under the Reform Act, a defendant cannot be liable for a forecast unless plaintiffs plead specific facts showing that the defendant actually knew that the forecast was false when made. Defendants may not be liable for the forecasts in the analyst reports because plaintiffs allege no facts showing that defendants actually knew that the analysts' forecasts were false when the analysts published their reports.

Defendants also cannot be liable for analyst reports unless the Complaint pleads particularized facts showing that "defendants . . . put their imprimatur, express or implied, on the projections." In re Syntex Corp. Sec. Litig., 95 F.3d 922, 934 (9th Cir. 1996) (citations omitted); see Stac, 89 F.3d at 1410. The Complaint must "(1) identify specific forecasts and name the insider who adopted them; (2) point to specific interactions between the insider and the analyst which gave rise to the entanglement; and (3) state the dates on which the acts which allegedly gave rise to the entanglement occurred." In re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1059 (N.D. Cal. 1993).

Plaintiffs do not plead specific facts showing that defendants were so entangled with the analysts' statements that they effectively endorsed them. Often, plaintiffs do not even allege that any defendant spoke with the analyst before a report was published. Complaint ¶¶ 63-64, 70. Otherwise, plaintiffs merely allege in conclusory fashion that Messrs. Strauch, Farmer, or Wagner spoke with analysts. Id. at ¶¶ 44-47, 49, 67-69, 73, 75-77, 81-82, 86 (Strauch and Farmer); id. at ¶ 54-55 (Strauch, Farmer, and Wagner). Plaintiffs never plead when these defendants spoke to the analysts, what was said, or what facts supposedly were provided to which analysts. See id. at ¶¶ 44-47, 49, 54-55, 63-64, 67-70, 73, 75-77, 81-82, 86. Courts consistently dismiss claims where the Complaint alleges no more than that unspecified defendants relayed unspecified information to analysts.²⁷

In a few instances, plaintiffs make the conclusory allegation that "TCSI's top officers received this report before it was issued and approved it. TCSI later reproduced this report and distributed it." Complaint ¶¶ 47, 49, 63-64, 75-76. These allegations are deficient because plaintiffs do not allege who the "top officers" were, or the manner in which the unidentified top officers supposedly endorsed the reports to the market. As explained in Stack v. Lobo, No. 95-20049, 1995 WL 241448, at *9 (N.D. Cal. Apr. 20, 1995), a plaintiff must "identify the particular >investor relations package' or provide the date on which it was sent out." Plaintiffs' allegation that "beginning in mid-May 1996" TCSI distributed an excerpt from the June 1996 Buyside magazine containing analysts' reports on TCSI fares no better. Complaint ¶ 70. Who distributed these reports, when, and to whom, and what is the source of plaintiffs' information?

V. THE COMPLAINT DOES NOT ALLEGE THAT MILLER, BOLGER, BANIN, HASLER, OR MESSERSCHMITT MADE A FALSE STATEMENT

In Central Bank of Denver, N.A. v. First Interstate Bank of Denver , N.A., 511 U.S. 164 (1994), the Supreme Court held that there is no cause of action for aiding and abetting a violation of Section 10(b) of the Exchange Act. The Court held that Section 10(b) prohibits only "the making of a material misstatement (or omission) or the commission of a manipulative act" and does not impose liability on persons who merely "giv[e] aid to a person who commits a manipulative or deceptive act." Id. at 177 (emphasis added). The Ninth Circuit has held that Central Bank eliminated all non-statutory theories of secondary liability under Section 10(b). In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir. 1995) (no liability for aiding and abetting or conspiracy). Thus, a defendant may be sued for securities fraud only where the allegations meet "all of the requirements for primary liability under Rule 10b-5." Central Bank, 511 U.S. at 191. Following Central Bank, Judge Smith has held that "with regard to allegedly false and misleading statements, only speakers may properly be held liable." Silicon Graphics, 970 F. Supp. at 759.

With these principles in mind, one searches the Complaint in vain for any purportedly false statement that was made by Messrs. Miller, Bolger, Hasler, or Messerschmitt. As a matter of law, therefore, the Complaint fails to state a claim against them for violation of Section 10(b). Neubronner v. Milken, 6 F.3d 666, 673 (9th Cir. 1993) (dismissing Section 10(b) claim where plaintiffs failed to attribute false or misleading statement to defendant). Although the Complaint alleges that Mr. Banin spoke with analysts at one conference call, its does not allege what he said or to whom. See Complaint ¶ 72. This conclusory allegation is clearly insufficient.

The Complaint instead alleges that the individual defendants were part of a "conspiracy," and that unidentified "top officers [of TCSI] received [an outside analyst's] report before it was issued and approved it. TCSI later reproduced this report and distributed it." Complaint ¶¶ 47, 49, 63-64, 75-76. These "conspiracy" allegations are directly precluded by Central Bank, which eliminated all non-statutory bases of primary liability under Section 10(b), and GlenFed, 60 F.3d at 592, which interpreted Central Bank as eliminating "conspiracy" as a basis of primary liability.²⁸

For the foregoing reasons, defendants respectfully request that this Court dismiss the Complaint with prejudice.

¹ TCSI requests that this Court take judicial notice of its press releases and various documents filed with the Securities and Exchange Commission (including the Annual Report on Form 10K, Quarterly Reports on Form 10Q, and the Prospectus filed for the March 27, 1996, secondary offering of TCSI securities). These documents are quoted or excerpted in the Complaint and are of public record, and copies are attached hereto as exhibits to the Kendrick Declaration. See In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 758-59 (N.D. Cal. 1997).

² As a matter of law, the Conference Report is the definitive statement of legislative intent: "[T]he authoritative source for finding the Legislature's intent lies in the Committee Reports on the bill, which 'represen[t] the considered and collective understanding of those Congressmen involved in drafting and studying proposed legislation.'" Garcia v. United States, 469 U.S. 70, 76 (1984) (quoting Zuber v. Allen, 396 U.S. 168, 186 (1969)); see Resolution Trust Corp. v. Gallagher, 10 F.3d 416, 421 (7th Cir. 1993) (conference report "is the most persuasive evidence of congressional intent besides the statute itself"). See also United States v. Granderson, 511 U.S. 39, 51-52 (1994) (impossible to determine the intent of Sentencing Reform Act provision without Conference Report or post-Conference debate).

³ TCSI's clients have included, AT&T, Bell Atlantic, Bell South, GTE, Korea Mobile Telecom, Nippon Telephone and Telegraph, PTT Telecom Netherlands, Stentor, and Motorola. Kendrick Decl. Ex. C at 3.

⁴ In 1992, TCSI reported revenues of $34 million and net income of $2.4 million; by 1995, revenues had grown to $55 million and net income to $8.1 million. Kendrick Decl. Ex. C at 4.

⁵ Compare Complaint ¶¶ 42, 52, 65, 79 and Kendrick Decl. Exs. A , E (TCSI's press releases announcing earnings) with id. at ¶¶ 44-47, 54-55, 63-64, 67-69, 73, 75-77 (analyst projections).

⁶ This is not the first litigation between the parties concerning these disclosures. On November 4, 1996, plaintiffs filed a virtually identical Complaint against defendants in Alameda County Superior Court, alleging state-law causes of action. Copperstone v. TCSI Corp., No. 775199-2. On two occasions, Judge Sandra Margulies has granted defendants' demurrers with leave to amend. Plaintiffs will file a Second Amended Complaint this spring. On November 20, 1996, a derivative action was filed against TCSI's Board of Directors in Alameda County Superior Court, alleging damages arising out of the Copperstone state action. Tinkler v. Hasler, No. 776206-4. Judge Margulies has heard two demurrers in this action as well. Plaintiff in Tinkler also will file a Second Amended Complaint this spring.

⁷ A "forward-looking statement" is a projection of financial items, a description of management's plans and objectives for future operations or economic performance, or the stated assumptions underlying these projections. 15 U.S.C. § 78u-5(i)(1).

⁸ The second part of the Safe Harbor creates a new standard of liability for forward-looking statements. A defendant cannot be liable for a forward-looking statement unless plaintiff proves that the forward-looking statement "was made with actual knowledge" that it was false. 15 U.S.C. § 78u-5(c)(B) (emphasis added). Defendants discuss plaintiffs' failure to plead specific facts showing that they actually knew their statements were false in Section II, infra.

⁹ Compare Complaint ¶¶ 65, 79 with Kendrick Decl. Ex. F (April 17, 1996 press release) and Ex. G (July 18, 1996 press release). The releases included the following Safe Harbor warning (emphasis added):

Statements contained in this press release which are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include fluctuations in customer demand and the timing and acceptance of new product introductions. Additional risks are detailed in the Company's filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.

¹⁰ The Safe Harbor warning in the prospectus reads as follows:

[T]his Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business."

Kendrick Decl. Ex. C at 4 (emphasis added). The Complaint also alleges that there were misleading statements in TCSI's quarterly report for the second quarter of 1996 on SEC Form 10-Q (Complaint ¶ 83), though one searches in vain for any of the allegedly false statements described in the Complaint. Kendrick Decl. Ex H. In any case, the Form 10-Q contains a Safe Harbor warning that referred investors to the 1995 SEC Form 10-K. Id. at 8.

¹¹ These warnings read as follows:

To date, the Company's product development has been primarily funded by customers as part of the development of software applications for such customers. . . . Internally funded research and development costs have been nominal to date and have not been capitalized. Management expects that, as a result of its product development strategy, internally funded research and development costs may become material in future periods.

Kendrick Decl. Ex. I at 3 (emphasis added).

¹² These warnings read as follows:

The Company has experienced and expects to continue to experience significant fluctuations in revenues and operating results on an annual or quarterly basis as a result of a number of factors, many of which are beyond the control of the Company. These factors include the cancellation . . . of license or maintenance agreements. . . .

Kendrick Decl. Ex. C at 5.

¹³ Copies of all unpublished decisions and WESTLAW and LEXIS decisions are attached to the Declaration of Christine A. Kendrick.

¹⁴ Complaint ¶¶ 14(a)-(b), (e)-(f), (j)-(l); 50(a)-(b), (g)-(i); 58(a)-(b), (g)-(h); 74(a)-(b), (e)-(f), (i)-(k); 84(a)-(b) (e)-(f), (j)-(l); and 87(a)-(d), (g)-(h).

¹⁵ Id. at ¶¶ 14(c)-(f); 50 (c)-(d); 58(c)-(d); 74(c)-(f); 84(c)-(f); and 87(c)(d).

¹⁶ Id. at 14(h); 50(e); 58(e); 74(g); 84(h); and 87(f).

¹⁷ Kendrick Decl. Ex. I at 3,5-6 (Form 10-K for 1995); Ex. C at 5, 7-8 (Prospectus); Ex. J at 11, 13-14 (Form 10-Q for quarter ended Mar. 31, 1996); Ex. I at 12, 16-17 (Form 10-Q for quarter ended June 30, 1996). TCSI's quarterly financial press releases urged investors to read those risk disclosures. Id. Ex. F at 2 (press release, Apr. 17, 1996); Ex. G at 2 (press release, July 18, 1996).

¹⁸ E.g., Complaint at ¶¶ 53, 66, 72, 80, 85.

¹⁹ See In re Syntex Corp. Sec. Litig., 95 F. 3d 922, 929 (9th Cir. 1996) (complaint dismissed; plaintiffs cannot avoid pleading facts that defendants had inside knowledge that rendered their statements false when made simply by alleging that such statements ultimately proved erroneous); In re Stac Elecs. Sec. Litig., 89 F. 3d at 1404 (complaint dismissed; plaintiff must set forth what is false and misleading about a statement and why it was false or misleading when made); In re Stratosphere Corp. Sec. Litig., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,473, at 97,182 (D. Nev. May 21, 1997) (dismissing complaint; plaintiffs failed to allege contemporaneous statements or specific reports showing that defendants' statements were false when made); In re Media Vision Tech. Sec. Litig., [1995-96 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,958, at 93,621 (N.D. Cal. Oct. 23, 1995) (dismissing complaint, plaintiffs failed to allege "precisely what were the underlying facts that made the statements false when made").

²⁰ See In re Oak Tech. Sec. Litig., No. 96-20552 SW, 1997 WL 448168, at *5-*6 (N.D. Cal. Jul. 1, 1997) (Complaint must allege when defendants were informed that customers would purchase fewer products, which customers did so, when purchases decreased, by how much, which internal reports showed these decreases, the contents of those reports, and how the alleged technical shortcomings in the product led to the adverse result); Zeid v. Kimberley, 973 F. Supp. 910, 920-23 (N.D. Cal. 1997) (complaint must quantify losses, specify transactions and the deficiencies in each transaction; merely listing customers and estimating the amount of "improper" sales not enough to withstand dismissal).

²¹ Plaintiffs also allege that TCSI improperly recognized revenue on license fees where "collectability" was not "probable." Complaint ¶¶ 94-97. The Complaint never alleges which contracts, with which customers, were of questionable collectability, or that TCSI failed to collect revenue it had recognized. These allegations clearly fail the Reform Act.

²² See In re Syntex Corp. Sec. Litig., 855 F. Supp 1086, 1096 (N.D. Cal. 1994) (statement that company "expected a very strong fiscal 1993" was "so vague or amorphous that no reasonable investor could rely"on it), aff'd, 95 F.3d 922 (9th Cir. 1996); In re Gupta Corp. Sec. Litig., 900 F. Supp 1217, 1236 (N.D. Cal. 1994) (statements that "business couldn't be better" and "we already have a sizable lead over our competition" not actionable); In re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1057-58 (N.D. Cal. 1993) (statement that company is "well-positioned for growth" held "too vague to constitute actionable fraud"); see also Raab v. General Physics Corp., 4 F.3d 286, 289-90 (4th Cir. 1993) ("projections of future performance not worded as guarantees are generally not actionable;" statement that company "expected annual growth rate of 10% to 30% over the next several years" inactionable).

²³ In considering this motion to dismiss, this Court properly may consider this publicly-available information, which plaintiff has put in issue and cannot be subject to reasonable dispute. By law, TCSI Directors' purchases and sales of TCSI stock are reported to the SEC on Form 4; their holdings of stock and exercisable options must be reported in TCSI's audited annual proxy statement to shareholders, filed with the SEC. See 15 U.S.C. § 78n(a), (c). Plaintiff does not allege -- nor could they -- that the audited proxy statements are inaccurate. This Court thus may take judicial notice of defendants' total holdings of TCSI stock and options as reported in the 1996 and 1997 proxy statements. Silicon Graphics, 970 F. Supp. at 768 (court may take judicial notice of defendants' stock and option holdings based on documents required to be filed with SEC).

²⁴ See 1996 Proxy Statement at 4 (Kendrick Decl. Ex. K). Figures are adjusted to reflect TCSI's 3-for-2 stock split in June 1996, and include options under TCSI's stock option plans that are exercisable on January 15, 1996, or within 60 days thereafter.

²⁵ See 1997 Proxy Statement at 4 (Kendrick Decl. Ex. L). Figures include options under TCSI's stock option plans that are exercisable on January 15, 1996, or within 60 days thereafter.

²⁶ See Acito, 47 F.3d at 54 (no fraud where defendant held 89 percent of his holdings); Silicon Graphics, 970 F. Supp. at 768 (individuals' sales of 2.6%, 7.7%, 4.1%, and 6.9%, and overall sales of 10% of total holdings, do not raise strong inference of fraudulent intent); Duncan v. Pencer, [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) at 94,208 (dismissing complaint; stock sales of $29 million not "unusual" based on defendants' "substantial holdings" after sales); see also In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1425 (9th Cir. 1994) (no inference of scienter where defendants retained bulk of their shares).

²⁷ See, e.g., Stack v. Lobo, 903 F. Supp. 1361, 1372 (N.D. Cal. 1995) (claim dismissed where defendants had conference calls and meetings with analysts, and attended analyst briefings); In re Quarterdeck Office Sys., Inc., Sec. Litig., 854 F. Supp. 1466, 1473 (C.D. Cal. 1994) (claims dismissed where "defendants were in constant contact with the analysts"); In re Ross Sys. Sec. Litig., [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,363, at 90,497 (N.D. Cal. Jul. 21, 1994) (claim dismissed where defendants provided detailed guidance to analysts through telephone calls, meetings and briefing); In re Software Publishing Sec. Litig., [1993-1994 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,094, at 98,762 (N.D. Cal. Feb. 2, 1994) (claim dismissed where analyst report based on information provided by the company); In re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1059 (N.D. Cal. 1993) (claim dismissed where defendants met regularly with analysts and supplied information on anticipated sales and earnings).

²⁸ The Complaint does not allege that these defendants were "controlling persons" of TCSI under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t. Accordingly, all claims against these defendants must be dismissed.